Vol Targeting
Scaling portfolio exposure so that realized volatility stays near a target (e.g. 10% annual).
Definition
Vol targeting means adjusting portfolio leverage (or notional exposure) so that ex ante or ex post portfolio volatility is close to a target level, e.g. 10% per year.
Why it matters
- Stable risk: Avoids over-leveraging in calm markets and reduces exposure when vol spikes.
- Comparability: Backtests and live performance are easier to compare across strategies when vol is normalized.
- Drawdown control: Lower vol target generally implies smaller drawdowns (though not guaranteed).
Common mistakes
- Using too short a vol window (noisy) or too long (lag).
- Ignoring correlation when scaling multi-asset portfolios.
- No cap on leverage (theoretical scale can go very high in low vol).
Linked strategies
See strategy database for: Vol Targeting (Multi-Asset), Trend Following (Futures), FX Carry.